Balanced View on Ameren Corp. - Analyst Blog

On March 18, 2014, we issued an updated research report on Ameren Corporation AEE. Ameren's stable and regulated electric power operations in the Midwest generate a relatively stable and growing earnings stream. However, the growth continues to be restrained by the present unfavorable macro backdrop, its predominantly coal-based generation assets and pending regulatory cases.

Ameren Corp., a Zacks Rank #3 (Hold) stock, posted fourth quarter 2013 earnings from continuing operations of 19 cents per share, beating the Zacks Consensus Estimate of 12 cents by 58.3%. Total operating revenue in the reported quarter was up 5.1% year over year to $1.32 billion. Reported revenue also surpassed the Zacks Consensus Estimate of $1.15 billion by 14.8%.

Ameren expects positive returns from its infrastructure investments in Federal Energy Regulatory Commission regulated transmission. Illinois energy delivery services will help its earnings to grow at a 7% to 10% compound annual rate through 2018 using 2013 results as the base. Ameren expects 2014 earnings in a range of $2.25 to $2.45 per share.

However, Ameren's electric and natural gas utility infrastructure projects involve substantial risks. These risks are related to escalating cost, unsatisfactory outcome from the project once completed and cost disallowances by the regulators.

Ameren's management rewarded shareholders by returning a substantial portion of its free cash flow through dividends over the years. The company's current dividend yield is higher than the industry as well as the S&P 500 peer group average of 3.5% and 2.1%, respectively. Again, the current annual dividend rate represents a 68.1% payout at the mid-point of 2014 EPS guidance, which is toward the upper end of AEE's target of 55%-70%.

However, profitability of Ameren's regulated utilities depends upon rate relief at regular intervals in the company's different service areas. Unfavorable regulatory decisions could lower its margins and restrict its ability to pay common stock dividends.

Key Picks from the Sector

Players in the electric utility industry with a favorable Zacks Rank include Exelon Corp. EXC, Otter Tail Corp. OTTR and Public Service Enterprise Group Inc. PEG. All of these stocks presently carry a Zacks Rank #1 (Strong Buy).